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Countries that end up on the European Union’s list of tax havens could subject companies
operating within their borders to tax sanctions—such as withholding taxes and denied
deductions for royalty payments—damaging the businesses’ ability to offset losses
in the jurisdictions.

Following a March 1 meeting, politicians identified a range of sanctions to impose
on companies in any country or jurisdiction that meets the criteria for being considered
a tax haven. According to confidential documents obtained by Bloomberg BNA, the sanctions
under consideration for the blacklist by the EU Code of Conduct Group for Business
Taxation include:

withholding taxes;

elimination of payment deductions, such as royalties;

restrictions via new EU rules for controlled foreign corporations; and

elimination of the participation exemption rule.

All of the sanctions could apply to an EU company doing business within a jurisdiction
that ends up on the EU tax haven blacklist, which is due to be finalized by the end
of 2017.

Based on the confidential documents, the final list of sanctions can be imposed via
coordinated measures such as EU legislation or restrictions through EU funding.

Country Screening

The EU Code of Conduct Group for Business Taxation is coordinating the bloc’s work
on the tax haven blacklist. It is currently preparing to “screen”
92 countries that fail to meet a range of transparency and corporate taxation criteria.
The 92 include the U.S. and Switzerland, as well as a range of offshore finance centers
such as Bermuda, the Bahamas, the Cayman Islands, Jersey, Guernsey and the Isle of
Man.

“Being listed for tax purposes by the EU is supposed to have already per se a deterrent
effect since this would very likely entail potential consequences in terms of international
reputation,” according to the document.

It adds that, nonetheless, “member states have asked for concrete, specific and direct
countermeasures linked to listed jurisdictions.”

Payment Deductions

Payments such as royalties, interest and services are currently deductible under domestic
law in EU countries when made to persons located in a non-EU country.

“At present this type of domestic countermeasure is triggered by different types
of criteria including transparency and harmful tax measures,” the document states.

The document notes that in some cases, “the deductibility of costs may be accepted
if the taxpayer can prove that the payments relate to the real transactions justified
on economic grounds.”

Controlled Foreign Corporations

The code of conduct document notes that the Anti-Tax Avoidance Directive, or ATAD—which
takes effect in 2019—provides options for sanctions when it comes to controlled foreign
corporations.

“Currently the triggering requirement provided for in the ATAD is essentially based
on the level of taxation in the CFC jurisdiction,” the document said. “As a first
option the triggering requirement could be automatically satisfied for jurisdictions
featuring on the EU list without the need to go to a case-by-case basis.”

Withholding Taxes

The potential withholding tax measures under consideration in the document “provide
for a more restrictive tax treatment for certain outbound payments when these have
been made to individuals or legal persons located in third-country lists for tax purposes.”

The participation exemption rule applies to dividends paid to shareholders that hold
“a given percentage of a company’s stock.” These exemptions are allowed via the EU
Parent-Subsidy Directive.

“A possible countermeasure could provide for denial or limitation of the tax exemption
if the foreign entity that pays the dividends is located in a listed jurisdiction,”
the document said.

Other potential sanctions listed by the conduct group in the confidential document
include:

reinforced monitoring of certain transactions that include special documentation
requirements for payments made towards listed jurisdictions; and

placing the burden of proof for the deductibility of certain expenses on the taxpayer
rather than the tax authority.

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